The pound US dollar exchange rate experience a volatile session on Wednesday. After hitting a low of US$1.3910 early on, GBP/USD trimmed its losses and moved higher, hitting a peak of US$1.4001 before dropping again to US$1.3898.
|What do these figures mean?|
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 GBP = 1.28934 USD
Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP
In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.
The pound was out of favour in early trade in the previous session as UK Labour data disappointed investors. The unemployment figure unexpectedly ticked higher to 4.4%, from 4.3%. Meanwhile the number of jobs created in the three months to December was just 80k, significantly lower than the 180k analyst had been expecting and a decrease from the previous month. Wage growth not including bonuses moved slightly higher, but this was insufficient to calm investor fears of a weakening labour market. Following the release, the pound tumbled
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
Sterling picked up the in afternoon, as Bank of England (BoE) Governor Mark Carney and three Monetary Policy Committee members were grilled over the inflation report by the Parliamentary Treasury Select Committee. Some hawkish remarks from Carney boosted invest hopes that an interest rate rise from the central bank could come as soon as May.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today UK GDP data will be the central focus. Analysts expect economic growth to be 1.5% year on year in the fourth quarter and 0.5% quarter on quarter. Investors will want to see how the UK economy is holding up as Brexit pressures mount.
The minutes from US Federal Open Market Committee (FOMC) January meeting, the last meeting which Janet Yellen chaired, showed that the Fed expected to see economic expansion in the US gain momentum. Many members of the Fed said that they had marked up their growth expectations since the last meeting, boosted by global growth, expectations of US tax cuts boosting the economy and supportive financial markets. The majority of members, therefore agreed that the strong outlook for the US economy meant that there could be a need to raise interest rates, possibly at a faster rate. The prospect of higher interest rates sent the dollar soaring, pulling the pound US dollar exchange rate lower.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.